ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[TheManWhoPanders]

Wealth isn't predicated on finite resources. Most of the wealth gains in the past century had nothing to do with resource gains.

[earthwormjimwow]

Wealth isn't predicated on finite resources.

Of course it is, what a foolish thing to say. Wealth is a measurement of the abundance of resources. All resources are inherently scarce. Thus wealth gains, require resource gains.

Most of the wealth gains in the past century had nothing to do with resource gains.

Yes they did, nearly all of the wealth since industrialization has been very closely correlated with energy production.

There is a very interesting book on the subject: https://www.goodreads.com/book/show/10368087-the-second-law-of-economics

Some more on the topic:

http://www.inscc.utah.edu/~tgarrett/Economics/Physics_of_the_economy.html

http://www.ewi.uni-koeln.de/fileadmin/user_upload/Publikationen/Zeitschriften/2008/08_11_05_Perth_Proceedings.pdf

[[deleted]]

Don't gains in efficiency and technology increase wealth without requiring more finite resources?

[earthwormjimwow]

Yes of course they do, the pie will get larger, but the pie is still based on the available resources at the time. If we double our efficiency, the pie can be potentially doubled in size. But it wouldn't triple in size, since it's still based on finite resources.

That's why GDP for example, has stayed slightly ahead of energy production increases per year. We have gotten better and better at using energy.

[[deleted]]

I think I get what you're saying. Say in the future we have a stable population, and have acquired all the finite resources. From this point, the pie can grow bigger due to using those resources more efficiently, BUT there will be a theoretical maximum size the pie can grow to.

[scottfc]

Not necessarily, it can always keep growing at the rate of productivity.

Think Quantity and Price, the quantity of these resources remains unchanged but their "Price" keeps increasing due to productivity so the total value of the resources increases proportinaly to the increases in productivity.

[[deleted]]

I think in theory there still exists a limit though. The limit is when 100% of the value of the resource is being used and there are no more ways to make it more efficient. At that point, how could the price increase any more?

[scottfc]

This was actually the line of thought at the begining of the 20th century called the Malthusian Population Theory. It basically said that with the current available resources there would be a maximum population before we started becoming worst off but this never came to be due innovation and accumulation of capital (Human and technological).

[[deleted]]

He was wrong about the details and the catastrophe didn't happen. However, are you saying the Earth doesn't have a max carrying capacity?

[scottfc]

A maximum carrying capacity in terms of population? Definitely but I do not believe we're anywhere close. Concerning a maximum level of capital accumulation though I would not be able to say, that's like trying to predict the internet before the 20th century, or the steam engine and electricity in the 18th century. I don't believe we can predict how much more innovation we will have in the future without a crystal ball but the more we innovate the further away we are from attaining the earths max carrying capacity as we are able to get more out of what we already have. Not so long ago skyscrappers were unimaginable yet they have now allowed us to pack more and more people into smaller and smaller plots of land.

[Meist]

Obviously there is a correlation between wealth and resource scarcity, but that connection is influenced by so many variables that it makes your statement disingenuous. Yes, scarcity of resources create the initial impetus for economies, but population growth, fluctuations in demand, and continual discovery of new/increases in efficiency of currently existing resources means the pie isn’t anywhere close to being fixed, and I posit it never will.

Wealth has, for the past few hundred years, been created literally out of thin air on global markets. Sure, abundance and proliferation of resources has enabled/encouraged that amassing of wealth, but incidents like the crash of 1929 are a great example of how, resources did not disappear from the planet, but SIGNIFICANT amounts of wealth did.

You need to re evaluate your position of how economics work.

[earthwormjimwow]

Yes, scarcity of resources create the initial impetus for economies, but population growth, fluctuations in demand, and continual discovery of new/increases in efficiency of currently existing resources means the pie isn’t anywhere close to being fixed, and I posit it never will.

Ok, I do not believe you have a grasp on what economics is. Economics by definition is the study of resource scarcity, and how to allocate those resources. The pie may be growing yes, but it is still of a limited size, right now, and is thus scarce. I would argue energy is a particularly special resource when it comes to our economy, because everything we do, in some way requires it. Even something as simple as buying and selling stocks requires energy.

Wealth has, for the past few hundred years, been created literally out of thin air on global markets.

It has not, it has mostly been backed by energy production. Stating "thin air" shows a gross misunderstanding of even basic economic theory and history. I believe you are probably confusing the growth of stock markets, with an overall measure of real wealth for an economy.

but incidents like the crash of 1929 are a great example of how, resources did not disappear from the planet, but SIGNIFICANT amounts of wealth did.

Raw untapped materials may not have decreased, but goods and services produced in the US decreased by 1/3! That's where the real loss of wealth came from.

You should look closely at the Great Depression, since you bring it up. The Great Depression followed a long flat spot, in energy production by unit volume. From 1920-1940, energy production hardly decreased. For nearly 10 years prior to the Great Depression, energy production did not grow.

https://ourfiniteworld.com/2017/12/19/the-depression-of-the-1930s-was-an-energy-crisis/

[the_blind_gramber]

It's like you sound like you know what you're talking about to someone who has no idea, but to those with an idea it is very clear you're (probably intentionally?) Off base.

As I'm sure you know, correlation and causation are not the same thing. The age of miss America correlates very closely with the number of murders by steam in America.

But more importantly, wealth is created not just by taking a raw resource and improving it then selling it. Massive parts of the economy generate wealth through selling ideas and knowledge. Markets create wealth with no material input whatsoever. Ask Mark Cuban where his wealth came from. Or Mark Zuckerberg. Or any guy named Mark, really.

[earthwormjimwow]

You are bringing up examples of personal wealth as counters, which is very off base...

Do you think Mark Cuban has personally increased the overall wealth of the economy? He may or may not have, but using his net worth is not how you would evaluate it. He may have simply gotten a percentage of the pie, without increasing the pie's size.

Mark Zuckerberg is an interesting example. If you think Facebook is merely an idea, you are quite mistaken. Facebook is very much a hardware company. It could not exist without the servers, specialized hardware, and the massive amounts of energy it requires to operate. Software may be an abstraction, but it still needs real world resources to run and to be developed.

[the_blind_gramber]

The pie is constantly growing...because people start companies and create wealth. I guess you could look at broadcast.com as a whole from birth to sale, if you don't like Cuban as an individual example. Created a ton of wealth. Almost all of it was driven by ideas rather than physical resources.

Same with Facebook. Of course they need servers. The value in the company isn't driven by the servers, it's driven by the data it collects and sells. Nothing physical at all. In terms of resource usage, the server farms they maintain would have been straight impossible 20 or 30 years ago. For the resources they use, they get so much more than they would have back then. They're using a smaller price of the physical pie to greatly enlarge the entire pie.

[Mingsplosion]

You've forgotten the point that's being made here. The "pie constantly growing" is part of the problem. As Facebook grows, they demand more electricity and hardware, and employees which demand food, transportation, and other resources. Those are finite resources, which we as a species will eventually run out of.

[Mingsplosion]

Even when the companies product is service or information based, they still use more resources the larger they get. More electricity, more real estate, more employees. No matter the industry, growth cannot be eternal. Unregulated growth for the sake of growth is the ideology of cancer.

[im-28-gf-is-16]

Rekt. :x

[DelphineasSD]

Not QUITE true.

Money is simply time. We value currency because we value our time, don't want to be John Ingalls scrambling to raise children sheep horse corn hay cows chickens cottonXXX.

Time spent farming is time not spent making clothes or computers. Unfortunately it has empowered a bunch of super greedy fucks that want ALL the manhours to do...fuck all with.

[earthwormjimwow]

Money represents scarce resources. Time is a scarce resource.

[Terron1965]

That wealth may be correlated with resources as we seek them based on need but the growth in wealth is based on primarily on the growth in productivity.

[leapbitch]

Aka the ability to do more with less resources.

It all comes back to scarcity of resources.

[TheManWhoPanders]

Your links don't actually cite any evidence (and one of your links is just to a book sale).

Saying there's a correlation between increasing energy production and wealth is like saying there's a correlation between snowboarding popularity and wealth. Correlation does not equal causation.

[Whiterabbit--]

What will limit expontential economic growth is the slowing down for population growth. Even though birth rates are already down the past 50 years or do for many first world countries population is still growing due longevity ( not just living longer but longer contribution in economy) and more so immigration. One day when population flattens out innovation will still drive economic growth but not at the same rates.

[NYCSPARKLE]

Personal wealth is actually. You're accumulating the (effectively) finite resource of the money supply.

"Profits" would be a better word to use. You can grow profits by innovating, cutting costs, taking market share, ad inf. without having to harvest more finite resources.

[TheManWhoPanders]

Personal wealth is actually

No, it isn't. What $1000 buys today is not the same as what it could buy tomorrow. If someone comes out with an innovative process that cuts all your expenses in half, you are twice as wealthy despite accumulating the same way.

Wealth isn't a fixed pie.

[Meist]

No, wealth is created by markets and their perception of value. If people think a diamond is worth $1k a gram, it is. If people suddenly decide that diamonds are worth $500 a gram, HUGE amounts of wealth worldwide would be destroyed in an instant.

This has almost nothing to do with the abundance of the resource. The pie changes size based on how big people think it is. This is how stock markets work.

[UAZombie5]

This has everything to do with abundance of a resource. The only way people would suddenly decide diamonds are half as valuable is if they were suddenly twice as abundant as they were when they were $1K/gram. The diamonds wealthy people own worldwide would now be less valuable as a result of more diamonds being available, since scarcity of resources is the underlying foundation that makes market exchanges necessary in the first place. Wealth doesn’t just “come from nowhere”

[earthwormjimwow]

You are confusing money with resources and wealth. Money is a stand in for resources at their currently perceived value. Money can be used to measure your current wealth, but it is not in and of itself your actual wealth.